1 Morningstar Direct (all performance percentages are total return based, which include reinvested dividend, interest) Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

The 2012 rally is well under way with the S&P 500, a broad market measure and benchmark proxy of U.S. equity market performance, posting its best first quarter performance in fourteen years and its highest quarterly total return since the third quarter 2009. It was also the equity market’s second straight quarterly advance, following an 11.8% gain during the fourth quarter of last year. Furthermore, Marc’s 3.3% gain was the S&P 500’s fourth straight monthly rally, its longest sustained winning streak since September 2009. The index is just 10% below its all-time historical high of 1,565 set on October 9, 2007 and trades for 14.5 times reported earnings, its highest trading multiple since July, but still well below its historic long-term average of 16.4. The S&P 500 is up over 29% from its October 2011 low and has since restored over $3.6 trillion in overall U.S. equity valuations.

The first-quarter rally was marked by the Federal Reserve’s continued low interest rate policy coupled with generally strengthening economic data showing the U.S. recovery remains intact and even building momentum. Investor sentiment blossomed in mid-March after 15 of the nation’s 19 largest banks passed the Federal Reserve’s 2012 capital stress tests, with many receiving clearance to boost shareholder dividends and stock buybacks. Despite the American-led nature of the rally, gains would not have been possible had European officials not finally taken the upper hand to control and backstop its sovereign debt crisis. Eurozone officials agreed to more centralized control over member nations, completed Greece’s second bailout to avoid default, and the ECB injected liquidity into the banking system with €1 trillion (US$1.3T) disbursed to the region’s banks. Europe’s debt crisis had long served as a short leash on U.S. investor sentiment.

Domestically, the performance of smaller capitalized companies is running nearly neck-and-neck against large-cap stocks as the Russell 2000 Index, a proxy of small-cap equity performance, rose 12.4% for the quarter. Growth beat value as the Russell 1000 Growth and the Russell 1000 Value rose 14.7% and 11.1%, respectively. Nine of the ten major U.S. sector groups advanced with five sectors posting double-digit gains. Financials (+22.1%), Technology (+21.5%) and Consumer Discretionary (+16.0%) were the leaders, while Utilities (-1.6%), a defensive-oriented sector, was the only sector to deliver negative sector performance during the first quarter. Outside the U.S., Japan’s strong auto exports helped drive its Nikkei 225 equity index up 19.3% during the quarter. China’s economic growth cooled, yet despite continuing inflation concerns and a slowdown in export growth, China’s Shanghai Composite delivered its best quarterly return in a year, up a modest 2.9%. China’s performance, together with Europe’s composite quarterly return of 6.9% on the Euro Stoxx 50 Index – contributed to the 11.0% positive performance on the MSCI EAFE Index (Europe, Australia, and Far East regions). After plunging over 18% in 2011, emerging markets have made an amazing turnaround, helping draw in well over $13.5B in new mutual fund investment during the quarter, according to Lipper. The MSCI Emerging Markets Index posted a 14.1% return on the quarter.

In the bond market, U.S. Treasuries registered their steepest quarterly price decline since the fourth quarter of 2010, driving yields on the benchmark 10-year Treasury Note considerably higher, up 34 basis points to 2.21%. For the quarter, government securities struggled, losing 1.1%, according to the Barclays US Government Index. At the other end of the credit quality spectrum, non-investment grade corporate bonds outpaced Treasuries, returning 5.3% during the quarter, according to the Barclays US Corporate High-Yield Index. That is the highest quarterly corporate bond performance since at least 1998. Investment grade bonds (excluding municipals), as measured by the Barclays US Aggregate Bond Index, rose just 0.30% last quarter. Municipal bonds, as measured by the Barclays Municipals Index, extended positive performance into a fifth straight quarter, delivering nearly 1.75% in total return.

This information is compiled by Cetera Financial Group. No independent analysis has been performed and the material should not be construed as investment advice. Investment decisions should not be based on this material since the information contained here is a singular update, and prudent investment decisions require the analysis of a much broader collection of facts and context. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. The market indices discussed are unmanaged. Investors cannot directly invest in unmanaged indices. Please consult your financial advisor for more information.

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